Microsoft Near Deal to Acquire Skype

Software Giant Could Pay Nearly $8 Billion for Company

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Microsoft
Corp.
is close to a deal to buy Internet phone company Skype Technologies SA for between $7 billion and $8 billion—the most aggressive move yet by Microsoft to play in the increasingly-converged worlds of communication, information and entertainment.

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A deal could be announced as early as Tuesday, people familiar with the matter said, though they cautioned that negotiations aren't yet final and a deal could still fall apart. Including Skype's long-term debt, the total value of the deal is about $8.5 billion.

Representatives for Microsoft and Skype declined to comment.

Buying Skype—a service that connects millions of users around the world via Internet-based telephony and video— would give Microsoft a recognized brand name on the Internet at a time when it is struggling to get more traction in the consumer market.

Microsoft has invested heavily in marketing and improving the technology of its Bing search engine. While it has made some market share gains over the past year,
Google
Inc.
still dominates the search market with more than 65% of U.S. searches going through its site.

Ballmer's Big Bet

Microsoft, led by its CEO, Steve Ballmer, would be Skype's fourth owner in eight years.

2003: Skype founded by two software developers, grows to 663 million registered users (8.8 million paying users) by 2011.

2005: EBay buys Skype for $2.6 billion in cash and stock.

2009: EBay sells about 70% to private investors in a deal valuing Skype at $2.75 billion.

2011: Microsoft nears almost $8 billion deal to buy Skype, which posted revenue of $860 million and a $7 million loss in 2010.

At a value close to $8 billion, the Skype deal would rank as the biggest acquisition in the 36-year history of Microsoft, a company that traditionally has shied away from large deals. In 2007, Microsoft paid approximately $6 billion to acquire online advertising firm aQuantive Inc. Many current and former Microsoft executives believe Microsoft significantly overpaid for that deal. But they are also relieved that Microsoft gave up on an unsolicited $48 billion offer for
Yahoo
Inc.
nearly three years ago. Yahoo is valued at half that sum today.

Microsoft Chief Executive
Steve Ballmer
,
though, sees the Internet as an essential battleground for Microsoft, a company that still makes the vast bulk of its profits from Windows and Office software systems. Investors have become increasingly concerned about Microsoft's ability to squeeze continued growth out of those businesses, as rival technologies from
Apple
Inc.,
Google and others put more pressure on profits.

The next phase of Skype's life could be as part of Microsoft. What could the software giant do with the service, and could it be a better fit than its former owner eBay? WSJ's Andrew LaVallee discusses with Alex Frangos.

The division behind Microsoft's hugely lucrative Office suite of applications also makes a product, known as Lync, which ties together email, instant messaging and voice communications into a single application. Skype could strengthen that offering.

The deal shows how far Skype has come since it was launched in 2003 by
Niklas Zennstrom
and
Janus Friis,
two men who had created a file-sharing technology called Kazaa that became widely associated with music piracy. While Skype was initially popular with techies, it increasingly worked its way into the mainstream by offering free or cheap phone calls which were especially appealing to international callers.

When
eBay
Inc.
purchased the company in 2005 for $2.6 billion in cash and stock, Skype was regarded as something of an experiment in which eBay's buyers and sellers would use the service to communicate about potential transactions.

The experiment faltered, and eBay gave up on Skype in 2009,selling a 70% stake to a group of technology investors including Silver Lake Partners, venture capital firms Index Ventures and Andreessen Horowitz, and the Canada Pension Plan Investment Board, who will make a handsome return on the Microsoft transaction.

Goldman Sachs Group Inc. and J.P.Morgan Chase & Co. advised Skype on the deal, according to people familiar with the matter. Microsoft is not using any financial advisers for the deal, the people added.

For all its promise, Skype has had a mixed history as an operating business. It has produced little net profit in the eight years since it was founded. Profits continue to remain elusive as the company expands its business world-wide. Last year the company posted revenue of $860 million and $264 million in operating profits, but still had a loss of $7 million. The company had $686 million in long-term debt as of Dec. 31.

Related

Skype uses a technology called voice over Internet protocol, which treats calls as data like email messages and routes them over the Internet, rather than a traditional phone network. Skype's software, which can be downloaded free, allows users to call other Skype users on computers or certain cellphones for free. Skype users can also call land lines for a fee and conduct video calls.

Skype could play a role in Microsoft's effort to turn around its fortunes in the mobile-phone market, an area where it has lagged badly behind rivals Apple and Google. The company last year launched a new operating system for mobile phones known as Windows Phone 7 that has been well reviewed by technology critics but hasn't yet meaningfully improved Microsoft's market share.

Microsoft will likely need to tread carefully, though, in integrating Skype into its mobile software because of the potential for pushback from wireless carriers, whose support Microsoft badly needs. Skype could give consumers a way to make cheap phone calls over the Internet from mobile phones, without paying higher rates to the carriers.

Last August, Skype filed documents to go public but put its IPO plans on hold after bringing in a new chief executive,
Tony Bates.
Skype had expected to raise close to $1 billion through its IPO, people familiar with the matter said at the time. At the same time, the Luxembourg-based company entertained conversations in the past with potential buyers and joint-venture partners, including Facebook Inc., Google and Cisco Systems Inc., according to other people familiar with the matter. Skype had sought between $5 billion and $6 billion to sell itself, they added. The blog GigaOm earlier reported news of Microsoft's interest in Skype.

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